The Record

“Yeah, because what data points to a hike right now, Andreas? Okay, the inflation or the growth parameter here looks relatively soft. But what data points to a hike here, really? I'm really struggling to understand that.”

“But yeah, as said, our now costing is incredibly soft again. And I think a lot of people underestimate the impact of the tariffs being paid back to corporate America, which is a big game changer to the reverse scenario that we had for most of this year and last year with tariffs being paid net-net.”

“But what if this energy shock is just over? I think it is. In short, I think the energy shock is over. It's been over for a while. Will that lead central banks to abandon this hiking path into next year? In such a case, we could prolong the business cycle for a long while.”

“So I think that was the first important voice within the committee stating that maybe updated projections for September will look a lot softer for inflation, which I think will be the case for most central banks.”

“But if you look at central banks and the reaction function from central banks and how that typically impacts the business cycle, I think there is a scope for more medium term stating that the business cycle could peak in rate of change terms in the fourth quarter of this year.”

“It's almost a cycle within this cycle, if you know what I mean. Everyone's watching this. Because if the export data out of South Korea rolls over, it's probably also a sign that we've peaked from the rate of change perspective in the export data overall, when you look at the AI trade.”

“Next question is what happens with the nominal growth from here? In all forward projections for companies related to this export trade, you basically see a flat projection in nominal terms, more or less, meaning that the market is undecided.”

“I think if economic growth stays higher than inflation, you can deliver the economy and that's, that's the policy going forward. But in terms of these, kind of like when imbalances rear their heads, it's really geopolitical statecraft.”

“And yes, it might degrade. I think really the truth is as long as you keep the financing costs lower than the inflation rate and growth keeps up, you naturally deliver the economy over say a 10 to 20 year span.”

“But I think they're too... In a 21st century economy, the power is where you really have to be concentrated. That's like the backbone of everything, because we've commoditized capital, right? So you have to go one up. Like, what's the next thing to keep economic growth in a 21st century economy?”

“So I expect the circus of headlines and policymaker attempts to stifle vol will not subside. It's only going to pick up. So get ready because every time yields start rising, the move starts rising, dollar starts rising, they seem to have an answer for it.”

“Oil is problematic. Global reserves are drained. Core is still very, very high. And they're having to resort to these inflationary stimulative tactics, liquidity additive tactics, despite all that. And it's a risk because the risk is that it instills inflation in this higher run rate place.”

“Their credit spreads are widening. You know, like, so... But then all of these band-aids are also temporary to like stifle of all. And the thing I have a hard time putting together is like, okay, what changed outside of two large Treasury and Central Bank interventions? Nothing.”

“That's, or invention. That's, that's just the mechanics of borrowing short versus long. And there's reasons you don't do this, because it's very stimulative. Like, it's very propelling of the wealth effect, which drives 50 over 50 percent of consumer spending, which drives demand.”

“We diverged from equities a year ago, and like, equities are the problem, and we know the fix to the equity problem is printing, and they just started their intervention tactics, like, way preemptively when the S&P was off 2.5%. So it's like, yeah, it's starting to get a lot more interesting.”

“But then when you look deeper, one notch deeper, you see what's going on with what Besson's doing with the Yen intervention, with Warsh talking to Trump every single day or every single week or whatever it is, that it's actually just, we're moving towards this regime of fiscal dominance now, it seem”

“And then you think about all the correlations that are correlated to the DXY as a basket. It feels to me like a way to get weaker dollar policy without spooking the bond market. And if you have lower dollar, that obviously has some insinuating effects to it that are liquidity positive.”

“Things like COVID, things like Russia-Ukraine War, Iran War, things like chaotic trade or immigration policies, all of that creates inflationary spikes. But if we stop doing those things, if we just stop wrecking things, disinflation will take over. Think of it this way.”

“Today, that trend left the station long ago. So, the way I look at Federal Reserve, is it still independent? Yes, US Supreme Court makes sure it is. Is it politicized? To some extent, all institutions are politicized. Does Kevin Warsh have different ideas? The answer is yes.”

“That comes back to the question of interest rates. Is Stephen Moran correct that real neutral rates are close to zero? In the United States, which means if you add inflationary breakeven rates, put your policy rates at about two and a half. Or are the dot plots correct?”

“The big difference to me is that a lot of the risks in our system have been expelled outside of economic and capital market cycles and been expelled outside the system. Where does the risk come from? Polarization, politics, geopolitics, climate, health care, technology.”

“One is consumer and business surveys. Now, those surveys do not really show any degree of unanchoring of expectations, whether expectations of wages or NFIB, for example, expectation of price increases over the next three months. There is absolutely no evidence that it is currently unanchored.”

“They remained broadly at 2.2 to 2.4%. So to me, I think from a Federal Reserve point of view, this transient versus permanent inflation, your signs will be when consumer and business pricing expectations changed and or where capital markets decide to reprice inflationary expectation going forward.”

“Longer term, I'm a great believer in productivity. But to me, that lies away at least 10 years out, not longer. So if I'm not a believer that there's going to be a sustainable rise in productivity in the next 5 to 10 years, then the only other alternative is violence or redistribution.”

“It's out of kilter what the real life is. I think the situation is worse than what BLS is saying. In other words, we have a lot more gigs, we have a lot more multiple jobs where people are trying to find a way of getting ahead and in most cases, failing.”

“They've been running a saving rates of 45% for more than three decades. Now, if you run saving rates at this level, that means you invest too much and you rely too much on exports. So, the problem is China misallocating capital at a faster space ever in human history.”

“And China still are not addressing this issue. So is China very strong, much stronger than people expect it? The answer, absolutely. Is it also has a weak foundation in terms of capital allocations? Absolutely.”

“It's been on a weakening path for a long while. The Japanese authorities have struggled to regain the momentum and they needed some help. This is the reverse of what we saw in 2011, where the authorities intervened against the strong Yen.”

“And as was the case in June, it's the case here in July, and prices are basically sideways. So inflation roughly zero on the month. That is incredibly soft, and it is so, so, so out of tune with the Federal Reserve. I cannot recall a timing where they've been this off in that direction.”

“And when he says that nothing is, you know, he basically says nothing, meaning that the Fed remains relatively hawkish while inflation is coming down. That leads to higher real rates. And I think that probably provided the match, as I wrote on Friday, for this whole momentum route in July.”

“But as I said, real rates have been increasing at an immense pace since Walsh took over. And by saying nothing, he said a lot, given that inflation is walks down so much. So the market has sniffed out a lot of what's going on and inflation now costs as well, by the way.”

“Everything that we see in our now broadcasting right now suggests that the dollar has more weakness coming up, and we've been leaning that way slowly but surely since the inflation data started softening in the US, but we'll give you more insight to that and how to trade the macro.”

“And so, Andreas, I wanted to bring in our macro regime, because obviously, what we're looking for here is, with the restart of the war attacks, closure of the strait, do we get another inflation bump? We're not really seeing that in our numbers yet. And I was a bit surprised by this.”

“But Indian growth is so high, and corporate profitability is growing so much. It's like China, but it has capitalism, and companies are allowed to make money.”

“When I first entered the business in 2019, people would say no one can ever raise rates because there's so much debt. But here we are six, seven years later and rates are higher. And yes, the overnight rate for Japan is only 1 percent. But the 30 year yield is very, very high.”

“The only thing that forces him to hike would be him basically trashing the Fed before for not hiking. And he's always said, the Fed is too dovish, the Fed is too dovish. And now it's his job and he's not hiking. It's like, how are you going to fight inflation if you don't raise interest rates?”

“So as a result, the inflation component is not going to go very risk on, it's going to constrain policy. But there's no real reason for central banks to hike aggressively. Growth lead indicators are broadly okay, and liquidity on our models are still fine.”

“So if everybody's savings rate is low and going down, that's somebody else's income, it just keeps flowing. And I think that's basically been the case for the economy. And that's still basically the case right now. Like the time to worry is when people start saving more.”

“So what makes this cycle tricky is even if you fully exhaust the private sector's ability to fund the capex, the government will find ways to try and step in, right? And you see the heavy involvement of the ministry of defense, or I guess the department of war, right?”

“Because traditionally, you're like, hey, I hide out in nominal bonds and I hide out in names like staples, right? All these are going to get hurt if you have like stagflation type of setup, right? So I think that's like a pretty meaningful regime shift in how markets operate.”

“Yeah, I think back in March, when we did our scenario analysis on the economies, we thought for the US, it's like WTI, we need to get to 120 to be the tipping point for recession.”

“So if your priority is jobs, it's very hard to solve the involution, I think, because you need to cut actual supply down to where the demand is. Because you don't want to do that, you have excess of supply versus domestic demand as you export, and everything is by export.”

“And that will be a Plaza Court type thing. So I think there's a non-zero risk of that happening. So I would like that shock to happen. And then I think Japan is at the macro situation more resolved and it will be more interesting.”

“Yeah. Well, like if you look, they've been like they have core, core, core, right? Like you strip out food and energy and you stripped out these institutional factors. And by the way, that's like we're at the turning point for the base effects from the yen depreciation.”

“The next piece is you need to shock them out of the fact, okay, we're going to have like real monetary policy. I think if you do that, then suddenly I think it works. But again, this is where I think the Taikei-Echi fiscal makes it really complicated, because interest expense is a big deal.”

“I think until Japan resolves the issue, generally, there'll be upward bias for yields everywhere, because Japan is kind of like, I think the lead indicated that they have the most broken fiscal versus monetary policy set up and flow set up.”

“So restoring the functioning of money markets, right? Removing the excess reserve regime, right? Allowing the market to actually do its job and provide a signal. I think that is so existentially important to restore credibility to markets. It's way more important than 25 bits or here or there.”

“Whenever the Fed says, you know, if the data continues this way, we'll cut rates or hike rates, the market just pencils in that it's a certainty, that's what they're going to do. And since market participants think it's a certainty, they tend to over-speculate and kind of get over their skis.”

“Well, that's why we have a 19-year high in the 30-year yield. So, I think they're going to keep going up until we get to that point that the market can say, okay, we've done enough to not worry about inflation. […] Either market levels will have to do it, or the Fed will have to change its policy.”

“If the economy is staying strong and that's one half of nominal and inflation is staying sticky, nominal growth is going up. What that means is that the fair value for interest rates is rising, so they should rise. Also, it means the fair value for the funds rate is rising.”

“We're about to have a political revolution in this country because of cost of living and affordability. And all the economists that I talk to are saying that there's nothing to see here, move along. So there's a big cognitive dissonance between these two groups right now.”

“If he was here with us, I'd say, why didn't you follow through on that and vote to raise rates? I think he's a fourth member that, in my mind, is almost surely going to look to raise rates. After that, now, we only need three more votes in order to get to, or two more.”

“So I could see them raising rates and I could see them doing it without Warsh if they have to do it without Warsh. But at the end of the day, I would argue that he would probably vote to do it. Because if you listen to some of the comments he said, like I said, mostly tried to say nothing.”

“And, you know, it's very obvious they have to keep inflating. […] It won't work. If that's the plan, it's a disaster because high real yields, when you have debt to GDP of 125% and it growing faster than your economy, so United States is a highly financialized economy.”

“In the last 6-12 months, all three of those have taken off like scalded cats as labor force participation rate has tanked. That is emerging market with a debt and fiscal crisis price action. There is no world where a declining labor force participation rate should be driving sharply higher yields.”

“Well, if they're borrowing money to do defense stimmie, they have turned sellers of bonds as well. And so not only is it inflationary, which reduces demand for attractiveness of long-term bonds at current yields, sends yields higher, but it also turns Japan from bond buyer to bond seller.”

“And so I think it's going to be a wonderful, delicious irony to watch. If he tries to do this, he will end up having to grow the Fed's balance sheet bigger, faster than Bernanke and Powell ever did in all likelihood. And so it's just everybody wants to pretend like the debt isn't 125% of GDP.”

“It wasn't like they had the cash flows to pay this stuff. And so if you forget about a down round, if you just have a slower round of refinancing things like OpenAI Equity, etc., the whole thing starts to come unwound. And that has capital flow implications, that has growth implications.”

“Kevin Warsh is a vigilante, right? He's talking about selling bonds out of the long end. The global sovereigns are foreign central banks, are vigilantes. They're not buying this stuff. They haven't bought this stuff for 12 years on a net basis.”

“He did though append an escape clause. This is a direct quote last week from Kevin Warsh. Quote, in periods of crises like the 2020 pandemic and the 2008 crisis, central banks by design need to step into markets to create a fair price, end quote.”

“Home prices have to stay high, equity prices have to stay high. Realistically, if either of those fall, the fiscal situation, which is already teetering, completely implodes. The Chinese, because they didn't do the dumb wars and because they don't have the social programming that we do, right?”

“But the alternative way to look at it is I can't remember a time with the idea of America not being able to afford waging a war that it is maybe a signpost of that negative side of things that you're talking about that we can't actually afford to wage this war.”

“And people paid back their loans at incredible rates. But the Chinese cracked down on it. They said, we don't want to have so much of a credit, consumer credit driven economy because it creates these negative feedback loops when the tide goes out.”

“And, oh, by the way, since China has large yuan swap lines set up with basically every country in the world, except for the United States, the swap lines are already there, you know, pay us in yuan or pay us however you like.”

“Which is to say, if I'm China, I keep oil prices low enough for there to not be a crisis, high enough to keep inflation rising while simultaneously selling everyone on every side of every conflict, the weapons they need because China is really the only person that can do that, and that includes the …”

“We want gold to replace the Treasury bond as neutral reserve asset. We want to internationalize the Yuan, which means we want to buy oil and gas in Yuan, and we're going to use gold settlement to do that. They've been very clear for 15 years, 16 years on this.”

“Because once one goes, they're all going to go. Once they all go, then we're right back to the same moment we've seen play six or seven times since 2020 or late 19, which is, does Warsh want to save the bond market, or does he want to save the dollar?”

“Maybe that's it, but all of it speaks to a conflict that is going to continue to go on, that is going to continue to add to global inflation because there will be tit for tat restrictions of supplies, et cetera, in both directions and around the world. And then go back to square one.”

“Supply chain interruptions are going to last longer than expected and sell bonds. People all over the world, by the way, are selling bonds. But in the last month, Trump got everybody together in NATO and what have you, and there appears to be a coordinated effort.”

“Their equity markets will be going bonkers on the upside in their local currency terms, their equity markets will be falling in gold terms because gold will really be going on the upside. Bitcoin would do really well in that case. So I think that's where this is all heading.”

“You know, the $64,000 question to me is, A, when and B, does Warsh decide he wants to be Mr. Tough Guy and pretend that he can fight inflation by hiking rates first? And that could be the catalyst for sort of, you know, the downside and rates running higher and forcing all this. I don't know.”

“I just saw that the other day. That's where I think this is all going to go, which is it just America needs to pivot into basically building ourselves out, fixing what we messed up, and then once we fix that, we're going to have really good products to offer people and compete on that basis.”

“So like, Warsh doesn't like Forward Guidance, but the markets are kind of saying, and this is even in the face of oil going back up, that inflation is coming back down. And I think they're overly hawkish, which is constricting a little bit of credit in certain pockets of the market.”

“They need the debt markets to provide capital for this stuff. So that's sort of what I'm watching is like, when does, when does the liquidity come back? Because right now we're tightening financial conditions and it's going to other other sectors that have better growth.”

“We pivoted hawkish when the economy and inflation and growth were peaking. Like it's not necessary. And then that creates an communication problem because you're always communicating to the market the wrong things. And Waller's speech, lo and behold, topped the two year.”

“And the two-year is not doing that because they're listening off just Fed. Yes, it's involved, but the two-year and front end rates market is doing that because of participants' ability to read the data, understand the data, forecast the data and imply what that means going forward.”

“The key moments are when policy shifts away from providing liquidity alone, but to actually recapitalizing the banking system, is that's when you start to resolve banking crises in a much more effective way. I'm not saying liquidity interventions don't matter.”

“So, in some sense, you could think of national banks before the Federal Reserve as each bank being a private bank, but also sort of a tiny central bank that gives some of the Senoraj. And this is another parallel to the stable coins under the Genius Act.”

“It's just capturing the idea that when you have a large inflationary shock, unexpected, you're going to transfer, you're going to redistribute away from debtors towards creditors, especially if financial contracts are long-term, fixed rate and not indexed to inflation.”

“And so the stock of debt went down, therefore banks couldn't get the collateral to issue it. And if I use that, if that's the case, maybe wrong, that clearly won't be an issue today, right? We're going to have plenty of treasury bills that will be issued.”

“We're funding a civil war. We need to get a captive audience. Let's make banks force them into buying these securities. So, the analogy today is we're running large, large deficits. Anything else that can help? Now, this won't solve our problem, but definitely extend the runway.”

“So there's shorter debt, and we definitely don't have that kind of price stability, like prices are flat. But we do have well-anchored inflation expectations for the most part. We still see 30-year mortgages and long-term debt.”

“Conversely, if it's a positive supply shock, which is AI right now, you get some disinflation, you have a boom. So inflation becomes countercyclical. So we get that. If that's the case, and if there are meaningful sticky nominal debt contracts, well, then the real debt burdens become procyclical.”

“And I think this is more like establishing the inflation credentials. And like you said, with oil coming down, inflation expectations coming down, you'll probably get okay data. And then they can talk about, okay, we're on the trajectory, we're on the path.”

“Whereas if you get payrolls 28K and 4.4%, they're going to say, oil appears to be cooling expectations and yeah, we got some other things on the services side, but second round effects from oil no longer a concern and we're good. And then they'll just slow play it and keep kicking the can.”

“The one microstructure thing is that I think data will probably be more important because you're not going to get the smoothing of all the guiding and coaxing of expectations in between meetings. But then again, we've had a lot of Fed speakers since war spoke, so I'm not sure.”

“It's a return to normal capitalism and bond markets that you would have seen before 2008 You know, it's sort of healthy economy with 4% yields in the US is probably a lot better than, you know, an economy with 0% yields anywhere.”

“So I'm not going to sit here and say like it's sustainable forever, but yeah, it is weirdly sustainable for much longer than. And I guess maybe the release valve is inflation, right? It's just it's harder for them to contain inflation when deficits are this big, or the release valves S&P 500 higher.”

“Yeah, it's healthy, but I feel like a lot of people thought that this wouldn't be possible with the amount of debt we have in the world now. That was it felt like that was the view. It's just like we can't do this because there's too much debt and it would just blow deficits and interest expense.”

“We're talking about a meaningful supply surplus that should bring oil prices below $70 a barrel by the end of this month, more or less. So I think it's a very, very benign development from an inflation perspective.”

“Because they hiked interest rates last week, citing concerns around second order effects on inflation and so on and so forth. But I'd also like to point your attention to a detail from their projections going forward, both on growth and on inflation.”

“I've said that all month. And now that we have a resolution, now we have prices from the Strait of Hormuz and freefall. We already had that before the resolution this weekend, but it's even more so the case now. I think central banks will have to abandon their inflation alarmism.”

“I'm not really tempted because I consider the price action very tricky to navigate right after an IPO. But I think the price action is another example of a great appetite for growth stocks. And I think it's another example of a better liquidity picture than feared by many.”

“Right now, it seems like asset prices are inflating, that almost every government in the world is running a fiscal deficit. There's inflation around that's made its way, I would say, more into asset prices than anything else. So right now, liquidity is good, markets are expanding.”

“So if in several years or perhaps even a decade, the Federal Reserve's balance sheet is much, much smaller, I think it is highly likely that the Fed will use one or some, or perhaps all of the techniques proposed in this ground breaking paper.”

“It's hard to measure. It's either they press a button saying your reserves have to go down, or it's via communication, which is a very soft tool that, at least with regards to the press, incoming Fed Chair, Kevin Warsh, does not seem to love that tool.”

“You can't simply sell assets today and avoid problems because all of the liabilities on the Fed's balance sheet are serving very important roles.”

“He's talking about the big game, which is the reserve balances. At least that's what I'm going to infer because that's 3 trillion, a lot more scope for reduction. Now, there's a smattering of other things, like money held at the Fed by foreign central banks and a few other odds and ends.”

“And I would just add it's asymmetric because if the Fed loads up too much reserves, it doesn't really cause a problem for monetary policy implementation because as you said, market interest rates are guided by the interest rate that the Fed pays on reserve balances, not by the quantity of money.”

“Think of this as you're running along a smooth highway and there are potholes, and the potholes, the level of the highway is the quantity of reserve balances in the system, and occasionally you're going to hit one of these potholes, and so you want to fill it in with temporary open market operations”

“With temporary open market operations. So that's one example. Another example is that at the end of every quarter, foreign banks that have accounts at the Fed are monitored for capital adequacy. And suddenly they want to reduce their balance sheets so they look good on capital adequacy.”

“What does that mean? It means they're reluctant to go to the discount window, to go to the Fed for repos, to get more reserves. And they're also reluctant to overdraft their reserve balance account at the Fed. They have this deposit account. Think of it as a checking account.”

“So it's a different regime. If the US financial system could adapt to that, it's called demand-driven regime, then rates would be more volatile, but the demand for reserve balances would also go down. The Fed could have a smaller balance sheet. So that's approach one. Approach two is communication.”

“So if the Fed were to introduce a liquidity savings mechanism like the one illustrated, which is from the Bank of Japan, then banks wouldn't be as stressed. They would be able to meet their payment needs with much less reserve balances. The Bank of England has a system that does this also.”

“So there's a mixed range of views at the Fed. My view is it's not simply providing options in my paper. It's not purely a clinical kind of plumbing paper. I also have the view that the Fed should develop these options in case they're needed.”

“That's way more reduction than could happen by that time. As I mentioned, easier ones are not that potent. If you really want to get a lot of reserve balances, it goes down to these things like liquidity savings mechanisms and tiering the remuneration of reserves, and those take years to develop.”

“Correct. But other central banks are not the Fed. The Fed is special. It's big and it's different. So I'm not suggesting that the Fed is going to go this way. But if it really wants to get its balance sheet down a lot, it may well need to consider going this way.”

“Let's say to manage a dysfunction in the Treasury market, if it needs to buy a few trillion of treasuries, that would be much more politically palatable when the balance sheet starts at a small level than when the balance sheet starts at 6.5 trillion and growing with the current framework.”

“And so that's really fed into, especially with oil coming down, that's fed into manufacturing, industrials, all the capex related activity and the broadening out. So small caps and the Dow have been outperforming tech over the last few months and trends like that.”

“They ended up reversing at Jackson Hole and then cutting, as we know, very similar setup, oddly, where committee pivots hawkish, they throw out all these dots, potentially three hikes in this year. And just at the time where today we see labor rolling over, we're gonna see inflation rolling over.”

“So yeah, I would be very cautious here if I was loaded to the gills with tech risk. There, it doesn't need to collapse today or imminently, but just going from like two hikes priced in to one hike or no hikes, is marginally better for liquidity.”

“Yeah, I agree. There was this divergence in the unemployment rate going down, but for bad reasons because the labor force participation shrinking. And that takes us back to the low higher, low fire supply constrained ideas that we've been, the Fed was talking about a lot of last year.”

“And yes, the Iran war and some of these acyclic things moving through core have elevated it, but all forward looking indicators show it's coming down meaningfully. And particularly if the equity markets stall out here, we know how reflexive that feeds into the economy. There's just a very...”

“And that by definition is cyclical things. They can't control the a cyclical. So for me, I guess the labor market would have to meaningfully improve and take like a step function higher. But we're reaching the seasonal point that always kind of shows the dampening.”

“But to his point, when you eliminate these dots and you let the market practitioners see the data and react to the data in the rates market, instead of all this convoluted reflexivity, realistically, you shouldn't get those big divergences where inflation swaps are plummeting and all these forward-l”

“So they have the tools to tighten via letting the long end price appropriately and reduce the duration of the balance sheet. That would tighten and that would be a Warsh ideologically aligned way to tighten. But that's way different than the front end rate policy.”

“We're not saying, like a lot of people sometimes hear, oh, the Fed's not going to hike, bullish, or oh, you're calling for no hike, so you think inflation's done. It's like, no, inflation's here for secular period. And I think the market just wants more comfort, especially on the front end.”

“So new orders versus inventories, that's starting to curve downwards. And you can see like manufacturing PMIs with a two-month lag will follow that lower. So that's super interesting to me. And again, wage growth is just down in the dumps.”

“But you can see like most of the treasury will change has been around real yields going higher. So if that is true, and we also assume that this re-acceleration surge and inflation surge is all peaking out right now, which I think it is. So this is a good one.”

“And like we looked at a chart of wage growth. It's just, it is completely different from end of 2021, like just categorically different. You cannot make the argument that there's a wage price spiral.”

“I have an extra view I think people don't appreciate on that. But just generally, you have economy firing pretty much on all cylinders, companies spending money, government spending money, interest rates extremely well behaved, surprisingly, earnings growing at an accelerating rate.”

“That's just the erosion. […] Yeah, a very strong economy. You have good, you have strong employment. You have earnings accelerating and you have interest rates that are too low. You have investors that are not very bullish. And you also have it in rising inflation, which is great for nominal assets.”

“I think they've been in the doghouse for 10 years. They are highly capitalized, highly profitable, loan losses are very low. And I think we're now finally getting kind of a top down regulatory change, government change. It's okay to lend. It's okay to take risk. We want the economy to grow.”

“So on a monthly level rate of change, liquidity has bounced, but on the other higher timeframes, still very much pointed to the downside. So we are still firmly in a liquidity contraction and we're only seeing a potential slight bounce there.”

“Of course, the dollar conversely bounced at the same level as they're inversely correlated. So it was interesting to see that. But the dollar is still showing a fair bit of strength. I mean, it really only bounced off of its 10-day moving average and is kind of bumping right back up there.”

“But he's also building up that balance sheet. And I think when you kind of change both of those parts of things, it makes the curve story and the macro story kind of two stories. And I think for a long time, a lot of it was a one story kind of put together.”

“But you can also have all these fluctuations in between them, because it's going to be kind of the talking heads take over, and they do their own interpretations, whereas it's historically for the past decade, it's been the Fed that has basically walked you to, here's what we're doing and here's how”

“And so we've, you know, issue more bonds and then it becomes this doom loop where, okay, we're falling behind on our payments and we don't have enough to make and interest is going higher. So we're paying more than we're getting in from tax receipts and it becomes this loop.”

“It is real, but I also think there is a point where you can't get, there's some people in Macro who are kind of like, oh, the dollar is gonna fall to zero because of this fiscal, and the only way to do it is to value like, I don't think that's a realistic way to view the world, because we're like, y”

“And I think just generally it causes a little more stress and a less clear path, but it's also, there's going to reach a point too, where like it is a relative thing, where eventually you reach a point where like it doesn't matter if it drifts a little bit higher, you have to then measure it against”

“Let's move on to a forgotten topic, deficits. We spent a lot of money on this war and other stuff. We ever going to pay any of it back?”

“So, if another country tried to say, use our yuan or our ruble as the global reserve currency, there's no bond market behind it that could possibly absorb central bank size capital flows. Is that true of the stable coins that are built on top of the US treasury?”

“But in order to maintain credibility, in order to not look like a puppet that many people would criticize them as being, not me, they had to come in and say, well, look, the numbers are high. Obviously, the market is way more worried about inflation right now than unemployment.”

“They're not going to allow a liquid treasury market. They're not going to allow problems in repo and kind of those shorter term lending markets to persist. And so the way that the prior Fed fixed it was going back to balance sheet expansion at a gradual pace.”

“I think for the foreseeable future, at least any sort of time horizon I'm monitoring, I think the dollar is trades in this choppy band, especially given that if you're using the typical weighting rather than broader weightings, the biggest comparable is the euro.”

“I think we'll have a combination of high nominal GDP growth, but also still large deficit growth. You get that mid to high single digits for deficit as a share of GDP. A pretty aggressive clip of treasury growth.”

“And of course, the dollar is even more needed than other developed countries. So that does give the US a longer runway, where you get something more like an acute crisis. I think people keep underestimating the depth of a problem it would take to really destabilize this to a complete spiral.”

“That being said, the consequences are already partially being felt. But instead of being felt in terms of a failed auction or persistent double-digit inflation in the near term, it's often felt in this two-speed economy.”

“So I think a lot of this issue shows up not in these kind of spectacular debt crises, at least anytime soon, instead it shows up in just ongoing political dissatisfaction, rising populism, and all the other complications that we feel indirectly on a somewhat regular basis.”

“And I don't have the numbers off hand, but maybe the base was in the trillion plus range, whereas the bull case was closer to three trillion. And even the Treasury Secretary cited it. When you actually read that report, I think it was a pretty good report that Citi put together.”

“And I think stable coins are just one more reinforcement for the dollar. And it mostly, again, it's a pretty organic demand. Like on the streets of Cairo, when people want to hold a foreign currency that they buy in the black market or the gray market, it's almost always dollars.”

“And in the next Fed meeting, six weeks away. So there's still time for this to play out. And I think we'll see that in July's CPI print and probably the labor market starts to cool too from its previous pace. You're already starting to see that in some of the weekly data.”

“That's so true. But it's hard to argue with a lot of these things on the list. I think the biggest that is probably also the most important is the balance sheet. It's pretty notable to me that the yield curve is doing exactly opposite what Warsh has communicated he wants to do, which is shrink.”

“But it's a different story when you have inflation still well above target and equities are down 10, 15 percent and you have to act in that regard too. I think it's an opportune time to be coming in for Warsh, because frankly, the decisions aren't that hard right now.”

“And I think also you sort of just need to get some volatility in traditional assets that instigates a normal response from from monetary and fiscal because liquidity is waning and it has been waning and it should continue to until there's a bigger crisis type event.”

“It's like, that's why I like all the smart stir traders I know, they're all just like, these hikes aren't happening, buying sulfur. I think we're all in that camp too, but it's going to test you. And it felt like yesterday was just that final test. We're just like, whoosh, man, this hurts.”

“Headline inflation is already going to be in the gutter next month looking at where oil is right now, and the swath market is pricing that. So I don't know, I feel, I very strongly believe that this was the capitulatory moment yesterday of peak hawkishness, and I think it's done from here on out.”

“The bond issuance is clearly very important to this next phase. And how are corporate bonds priced? Not off-sofa, off the longer end of the yield curve. So okay, putting these things together. Warsh and that team, they really care about making sure that the AI build out wins and that we beat China.”

“I'm pretty sure, given breakeven inflation rates, that things are getting pretty tight, and real rates are tightening global liquidity pretty hard. We're watching, we have a bunch of charts to back this up, but the dollar is breaking out here higher.”

“And then you see, you know, the 10 year yield went to 450 almost, it just gets smashed down today because it really is putting a pinprick in potentially growth and definitely inflation. Like inflation, long-term inflation expectations, I think came down on that hard.”

“This is the 20-day historical vol and the 7-day historical vol of the dollar. Generally, the way I see it is, when you get a policy shift and you get some funky happening, first, it goes to FX, then it goes to yields, you get volatility in FX, volatility in yields, then credit spread widened.”

“Then I guess, should I go through the other ones I have too? All right. So what did this do when global equity gets constrained? If you go to 52, the dollar starts rallying, because everyone flees into US assets. Then if you go to the next one, this one I thought was interesting.”

“Like the one thing that's tricky to me is, okay, Japan's, the end is really weakening and breaking out, you know, it's getting weaker here. That's when this is rising, that's getting weaker to the dollar. But now oil's rolling over there, they're a huge importer of like commodities.”

“This is the 2s to 10s curve in the US. And so I wonder if this is really the framework, which is you have so much boomer cash. Like there's a lot of cash in the boomer generation that is searching for yield. And by like saying you want price stability, you take the long end down, right?”

“I think they're trying to basically flatten the yield curve here so that we have a generational turnover in housing, right? If you get mortgage rates down, then you get, you know, boomers are basically, they have got to be selling. Home affordability is just terrible.”

“Like, I guess you could say this is like, growth is going down with inflation longer term. That's sort of what this is saying. So, I don't know. That's sort of my big macro read here is, we got to make sure, number one, the dollar doesn't cause some problems with the carry trade.”

“By if you actually let the prices tell you what it is, supply and demand actually let things work, which means once the corporate bond market sees, we're oversupplying all this issuance from SpaceX, from Meta, from Google, from whatever, who issue longer-term debt, once that overwhelms the market, t”

“I couldn't agree more that stable coins are really important, probably more important than most people understand. One place I kind of see it differently is, I think you're right that US dollar stable coins are likely to be the saving grace, if you will, for the US dollar as global reserve currency.”

“As that happens, as citizens from around the world, choose to hold a US dollar stable coin rather than holding their local currency, the transfer of monetary sovereignty starts to leave that local jurisdiction and that local government, and get transferred to Washington DC.”

“And the exact same thing applies to the dollar index. If you get too low, it causes problems. If it gets too high, it causes problems. And so in this paper, we kind of paraphrased Billy Bob Thornton's comments about the price of oil to the price of the dollar.”

“But if you look at things like FX turnover, if you look at cross-border lending, if you look at trade invoicing, they're all as high now as they have ever been and they're higher than they were 30 years ago.”

“It never goes their way on both of them. And the reason it never goes their way on both of them is because currencies trade relative to each other. Now, as long as we stay inside the band, even if one of those carry trades is going against the other one, it's manageable.”

“And just because the world doesn't like something doesn't mean they have the ability to get out from underneath it. And the United States, for all its problems, has many advantages. And we tried to explain what those advantages are specifically through the dollar lens in this paper.”

“The thing that's the real eye-opener for me, and this gets back to the core thesis of our book, How to Listen When Markets Speak, is when you go into an elevated inflation regime in a multipolar world, think about multipolar global conflicts, higher interest rates, higher inflation, stubborn oil pri”

“All these stocks are essentially close to 19 to 20 percent off. Home Depot almost 30 percent off. And so once again, it's two different consumers. One part of the market is in a lot of pain, and the other part of the market technology and semiconductors are partying like it's 1999”

“Erik, so we just talked about the consumer and how weak the consumer is. You could see this in a lot of the conference calls. You could see it in the restaurants. You could see it in Home Depot. You could see it in so many different parts of the market. So it's very tough for the Fed to hike rates.”

“So, the muscle memory in the market thinks the Fed's going to hike. That's causing this flattening of the curb in 2030s. But to me, it's a facade. It's a mirage. They really can't hike that much, and that means the curves are going to steepen a lot over the next year.”

“So I'm going to shrink the balance sheet. Okay. Well, that all else equal puts upward pressure at the long end. Okay. So now I'm steepening the curve. Great. Now I'm going to go to the banks and say, hey, I'm going to deregulate you banks under the auspices of, hey, Main Street, not Wall Street.”

“Doubles. Okay. So that is all sort of the issue alongside, my view is ultimately the Fed won't be independent, they'll be effectively more married with the Treasury. Maybe it'll be smoother because Warsh and Bessent work together under either Druck or Soros, I can't remember.”

“And last week, I put $158 in it. So. The issue is ultimately, you need energy and food, they're higher on Maslow's hierarchy of needs than you need treasuries, US dollar stocks, etc. And so market action of dollar down, bonds down, stocks down is capital flight. That's money leaving the dollar.”

“I think that's what his whole plan is, or at least was before this silly war started, which is I'm going to cut rates, I'm going to sell the long end, I'm going to have the banks backfill it with regulatory removal and then they can still lend to Main Street, and I'm going to get on the horn and tel”

“It's ultimately still going to drive higher rates because of the context in which it's occurring, which is to say debt to GDP, US net international investment position, foreign borrowing of dollars, rates are going higher no matter what he chooses, but at least this is sort of good.”

“Look, pro tip. If you're in the administration, you're listening to pro tip. If you're going to spend three years, two and a half years shifting issuance to the front end because the back end is blowing out, you can't be stupid and start an inflationary war that sends a front end up.”

“I think Hormuz stays closed through fall. I think sometime between now and Labor Day, people start to hit tank bottoms and oil charts start to do this. And once that happens, then they're really hosed, because now what do you do? You got to raise rates to fight inflation.”

“That's emerging market price action. That's a market saying the higher your yields go, the closer you are to a debt crisis that you're going to have to print your currency into oblivion. That started like last year and shortly after the US and China met in Busan, Korea in October.”

“We sort of had the big pickup out of 22 and 23 They backed off a bit in the last couple of years, and now they're all breaking out again. And that's not good for anything. It's just, it's bad for bonds, bad for stocks, it's bad for risk, it's bad for gold, it's bad for Bitcoin.”

“Obviously, headline was above 4 percent, largely driven from what's been going on in the Iran war, which you've been talking plenty about. But overall, just seems like a very different mix of factors going into this meeting versus when he was first nominated to be Fed chair a few months ago.”

“Look at what's a trimmed means inflation is his favorite one, which just so happens to also be the lowest one. But yeah, yeah, imagine that. But you know, it's easy to convince the public, but he also has to convince the rest of the committee, which is looking incredibly divided right now.”

“Because I'm surprised, too, because typically, if you just see this energy supply shock like we've seen, that is way worse for the rest of the world compared to the US. I'm in agreement. I thought Dixie would have been way higher right now, but it's not.”

“I thought people were too overweight the hawkish balance sheet side without understanding the premises of deregulation and cutting the short end. But yeah, now we're in this moment where, okay, we have the complete opposite situation and I'm just trying to figure out what the hell the plan is.”

“Between the government deficits and the AI build, I mean, it's just a pile of money gushing through the economy. It find it very hard to see how an economy goes into recession with those kinds of numbers. Public deficits are private sector surpluses.”

“So one way or another, that money is finding its way through the economy as well, right? The inflationary impulse was broadening and expanding even before the oil shock. I don't see how hikes don't happen, or at least talk of hikes when you get pricing don't happen.”

“It is just so big. And then you kind of combine that with our still large government deficits, you know, between the government deficits and the AI build. I mean, it's just a pile of money gushing through the economy. And it just keeps getting bigger and bigger.”

“So I think as long as the profit margins keep expanding or at minimum hold their own, then this trade is still on, because ultimately the profit margins reflect the economics, the underlying economics of the enterprise and of what they're doing with the AI buildout.”

“I was just gonna add that that does have long-term impacts on productivity and profit margins. If you have working capital tied up, and you're not optimizing your capital structure because of these persistent shocks, then that will lead into profitability.”

“It's still the same pot. It's still your net worth, your wealth. And when people feel wealthier, they're going to save less and spend more. So I think we've got these kind of this three-legged barstool of that's pro-consumption. What's the boom of parents helping out? It's the wealth effect.”

“So one way or another, that money is finding its way through the economy as well. Right? The government is spending it. It may get its way to the private economy. Of course, there's distributional issues and who gets what. But that's from a macro aggregate standpoint, it's really irrelevant.”

“Yeah. No, that's really a big part of it. I mean, these are World War II style deficits. I mean, the last time we had deficits this size, I mean, during the Reagan military build-up, I think our deficits were like maybe 3 or 4 percent. And that was kind of like people were just gas at that.”

“One of the things that they weigh very heavily is, you know, a decline in the labor market. And we just are not going to get a decline in the labor market at a magnitude that would be consistent with recessionary conditions. It's just not there. I mean, we're effectively at full employment.”

“Yeah. I mean, I've been thinking about that for a while. You know, back March 1st, I called none and done. You know, we were not going to have any rate cuts by year end, because the inflationary impulse was broadening and expanding even before the oil shock.”

“It's the basic idea of, you know, at what rate can wages grow without impacting inflation? We're at risk of running above that level because, you know, there's more inflation and there's, you know, the labor market is not rolling over.”

“Absolutely. Absolutely. And you see with the, if you look at the ISM numbers too, the price is paid component of ISM, that is on fire. I mean, really strong numbers that we haven't seen since 2022 So, I mean, this is not just like gas pump.”

“But he's in a pickle, and I think he's trying to navigate it by moving the goalposts. So he's trying to push for a new inflationary metric. Instead of being core PCE, he wants to be Dallas trimmed mean PCE. And the problem with that is, the Dallas methodology is not symmetric. What does that mean?”

“We had the tenures at 460 or 460, the peak at 460 about three weeks ago. That, you know, figuring out the reaction function and the credibility of the institution and forcing it matters more than just where are rates. That's kind of a secondary issue. Markets will adjust.”

“I mean, we haven't been at the 2% target in a lot of years now. You keep having these supply shocks that keep happening. That I imagine these managers who are making these decisions are like, well, I'm going to err on the side of caution and pull forward my inventories.”

“We have better clarity on the fact that, okay, we were actually like you just said, probably at maximum or full employment. And now you have an oil shock and accelerating inflation. Suddenly, here we are in early June, and we have rate hikes priced at the curve. How are you thinking about that?”

“And if you just look at something like a Taylor rule function here, which I have on this chart, Fed funds rate is below policy rule prescriptions up to the last round of insurance cuts. Even with Fed's R-star estimate included in this chart, it would be a larger gap under DB's R-star estimate.”

“I mean, it's hard to believe because there's just zero consideration for how bad that lower shape of the K is going into midterms. I feel like every time I think about it, it just blows my mind that there's just no regard for how bad the average person is doing right now.”

“And we've seen this savings start to occur. And you can see these incomes, they're accelerating to the downside now. And therefore, to keep up with such an energy shock like we're seeing, they have to tap their savings rates. So you can see like personal incomes are trending negative now.”

“And this is why energy supply shocks are such a nightmare for central banks is that you have the supply shock in terms of headline inflation going higher. But at the same time, you can see that incomes are actually negative for like the first time since 2022 when they were abruptly there.”

“But then you have the offsetting factor of the Trump appointee and pressure. But Powell's been unbelievably dovish himself and all the balance sheet, RMP supporting the long end. All those shenanigans have been in many cases more stimulative than what rate cuts would have done.”

“And then you can cut rates. And those rate cuts help Main Street and the small low income engine of the economy. And so they're purposefully doing the opposite of that, which comes at the direct expense.”

“I think this is wartime policy. And basically because we have a massive deficit, we have a trillion dollars of interest, a massive amount of debt to be rolled. I think we're getting our answer, which is the market's telling us we're growing our way out of this no matter what.”

“And it's a sign that it's not like a free market. And it's really not. Like, because of the debt and all these things that they have to pay off, there's just like giant centralized toll booths that get the benefit of all the fiscal spend. And then it slowly just erodes the lower labor.”